Whenever politicians wish to score political points, they recommend raising the minimum wage. Parading as champions of the poor and downtrodden, they cry out against all those selfish and greedy employers who are paying less-than-subsistence wages to their employees.
The truth is that whenever public officials enact or raise a minimum wage, the only people who get harmed are the very people who are supposedly helped-those at the bottom rungs of the economic ladder.
In every voluntary economic exchange, both parties benefit. Each party to the transaction gives up something he values less for something he values more. If such were not the case, he wouldn’t enter into the transaction.
The principle applies to labor relations. When an employer and employee voluntarily enter into working relationship, both of them benefit. The employer values the employee’s work product more than he values the money he is paying the worker. The employee values the money more than he values the time and energy he is devoting to the business.
Let’s assume that a certain employer offers to pay a job applicant $2 an hour and that the applicant refuses to take the job. We can assume that the applicant values his time more than he values the money.
What if the applicant offers to work for $5 an hour and the employer refuses? Here, the employer values his money more than he values the work product of the employee.
All of sudden, politicians step in with a law that requires employers to pay a minimum wage of $5 an hour. Is poverty alleviated? Is “exploitation” eradicated? Is the worker helped?
No. After all, a minimum-wage law does not force an employer to hire an applicant. The law simply says that if an employer hires an applicant, he must pay the legally established rate of $5 an hour. Which applicants will get hired? Only those workers whom an employer would have been willing to pay $5 an hour anyway.
In other words, if an employer values the money ($5 an hour) less than he values the work product of the employee, he’ll hire the employee. But in such a case, the minimum-wage law is superfluous because the employee would have been hired in the absence of the law.
What if an employer values the money ($5 an hour) more than he values the person’s work product? Then he doesn’t employ him and, thus, the minimum-wage law has accomplished nothing.
So, what’s the problem? The problem is that the minimum-wage law locks out of the labor market all of those people whose labor is valued by employers at less than the legally established minimum wage.
For example, suppose an employer and a worker both wish to enter into a working relationship at $4 an hour. The minimum-wage law prohibits them from doing so. Thus, the worker is condemned to unemployment and the employer loses the value of his labor services.
So, how would wages ever rise in the absence of minimum-wage laws? There is one and only one way that wages can rise in a society: through the accumulation of capital. With capital, workers become more productive. A farm worker who uses a tractor will produce more than his counterpart who uses a hoe. And more productivity means more money with which to pay higher wages.
Doesn’t this mean then that employees are at the mercy of the kindness and benevolence of employers to pay them higher wages when they produce more? No. What motivates even the most self-seeking, profit-grabbing employers to pay higher wages is the prospect of competitors’ bidding away their workers.
After all, if in the absence of minimum-wage laws, employers would pay only subsistence wages or less, then why do so many businesses today pay their employees more than the minimum wage? Competition in the labor market, not kindness or generosity, forces employers to pay the higher wages.
The key to raising standards of living then, especially for those at the bottom of the economic ladder, is (1) to prohibit governments from “helping the poor” by confiscating massive amounts of income and capital from the rich and middle class and (2) to prohibit government from “helping the poor” with economic regulations like the minimum wage.
If poverty could be eradicated with minimum-wage laws, everyone in the world would be rich. All that legislators would have to do is raise the minimum wage to match what they make. Come to think of it, why haven’t they?